How businesses can reduce their cost-to-serve to survive the recession

At the start of August, the UK was plunged into its deepest recession on record. While this is hardly a surprise, given how COVID-19 has wreaked havoc on the global economy, it has added to the pre-existing level of uncertainty, for both businesses and people.

Slimane Allab, Senior Vice President and General Manager, EMEA, LLamasoft
Author: Slimane Allab, Senior Vice President and General Manager, EMEA, LLamasoft
October 22, 2020
St Pauls Cathedral and an empty Millennium bridge during the pandemic lockdown in London, April 2020

Already, the UK has seen thousands of job losses, with more expected while some businesses are even closing stores to cut costs. During a recession, the mentality of many businesses and organisations shifts to survival.

However, although their minds might be on the immediate, their actions should still have the future in mind. Within their supply chains, businesses should always be looking at ways they adapt to meet shifting customer expectations. At the same time, organisations must create the necessary agility to address demand and supply variability, while all the time trying to cut costs. It can be a hard balance to strike. Yet, for many, there is huge room for improvement within their supply chain which can help to reduce their cost-to-serve, creating a more efficient, profitable and, most importantly, customer centric business model in the process.


Tough times
The Great Shutdown sent the world into a historic recession – countries from all over have witnessed double digit economic contractions. This means that businesses across the globe will now be looking to cut costs and become leaner to survive the economic turbulence.

This necessity to cut costs is vital as, during a recession, consumers are often more careful with their money. Uncertainty over job security, which is part-and-parcel of a recession, only amplifies this frugality. For businesses, this means they have to do more with less in order to operate at a profit and keep the doors open.

In this instance, businesses often look towards their labour force to cut the wage bill and towards their physical warehouses, stores and offices to reduce overheads. While this may be a quick way to reduce costs, it does result in losing valuable resources. By addressing inefficiencies within the supply chain, this doesn’t have to be the case.


A happy customer for less
When it comes to cutting costs, the supply chain is often overlooked for one reason: there is an assumption that it is a fixed cost and that increased sales naturally drive economies of scale. This couldn’t be further from the truth. Businesses looking to become leaner should address their cost-to-serve, defined as the analysis and quantification of all supply chain activities and costs necessary to fulfil customer demand.

This analysis will help businesses to highlight which customers and products are the most and least profitable within their supply chain. With this information, they can make decisions around whether it is worth continuing to provide that product or serve that specific customer and/or what needs to be done to make it more profitable. Often, businesses have the opportunity to make better use of their existing capacity by making smarter decisions. Understanding and deciding which product sells better or for a higher price in which market can ensure maximum profitability. For example, an unbranded product is likely to sell better in the UK than in France. With this knowledge, businesses can optimise their supply chain to ensure their products are going to the places where both demand and profit are highest.

In terms of cutting costs, one area within the supply chain which can lead to a high cost-to-serve and lower profit margins is transportation. Businesses looking to minimise this can evaluate their delivery routes to make them as efficient as possible. This can be optimised from the first to the last mile of the supply chain, accounting for both the raw materials needed to produce the product and delivery of the product itself. This also has the added bonus of enabling businesses to become more sustainable. As well as maximising profit, improving transportation efficiency will create a more carbon-neutral supply chain, helping businesses reach their goal of becoming net zero between 2030-2050.

There are, of course, other ways in which businesses can reduce their cost-to-serve, which is why it’s such an efficient way to cut costs. The manufacturing process is another area of focus. There is often huge scope for automation in this area, which can significantly reduce the cost of production and lead to greater productivity. However, businesses must be able to identify these pain points if they are to address them. Technologies that apply AI and machine learning could help them do exactly this.


A helping hand from technology
Optimising the cost-to-serve is achieved by analysing and assessing all the supply chain activities in the network. From this point, fixed and variable costs can be allocated according to each of these activities, allowing businesses to address the areas which can be improved. While many companies have the ability to do this at an aggregate level, eg, a product category, few have a truly granular view of the costs associated with individual SKUs or customers.

Understanding detailed cost-to-serve, by customer and by product, is a pre-requisite for any organisation looking to manage its profitability. Reducing organisational costs and improving delivery efficiency as well as ‘right sizing’ the service offering for a particular product, customer or channel is an imperative. Organisations can model routes to market and service strategies based on this segmentation, and understand the impact on their individual cost-to-serve

The ultimate goal is to increase company profitability by making unprofitable customers profitable or helping profitable customers become even more profitable. But, without accurate cost-to-serve data for current customers and products, this is a near-impossible task.

For this to be a reality, organisations need an end-to-end view of their supply chain. Using digital twin technology businesses can digitally replicate their supply chain, analysing and optimising its efficiency in the process.


Finding a solution
Running this analysis, businesses will be able to quickly identify which products and customers are less profitable than others and the reasons for this. With this information on hand, they can more readily address the problem, whether it is an inefficient delivery process or excessive manufacturing costs.

Using the same technology, businesses can then work towards a solution, which will help them become more efficient. The digital twin allows them to test-drive alternative strategies, before committing to them in the real world. This way, they can continue to try different options, at no cost, until they find the most efficient solution.

To achieve maximum efficiency, businesses can then look to forecasting technology, which will help them to predict oscillations in demand, even during the heightened disruptions caused by COVID-19. With recessions often causing a downturn in demand, it’s important that businesses are not creating excess supply, which will cost them money without a return on their investment. Forecasting technology will help them avoid this pitfall.

In today’s never normal world, whether it is recessions, pandemics or geopolitical tensions such as trade wars, businesses that want to stand the test of time must be prepared for all eventualities. While it may represent an initial cost, implementing technology which can consistently optimise your cost-to-serve will ensure that, no matter the economic climate, your business has the best chance of maximising its profit. That should be the benchmark of any successful business.